ViacomSeeBS
RJ Steinhoff, CFA Investment Process
Only in the movies do we typically see stories like this one. Shares of media companies have rallied significantly from the March 2020 market bottom, but none can match ViacomCBS’ astonishing 780% move from trough to peak. Disney and Discovery staged impressive rebounds too, rising over 115% and 320%, respectively, both well ahead of the S&P 500. But, clearly, ViacomCBS was in a league of its own. While movie theaters in many countries around the world are slowly welcoming patrons back, the accelerated adoption of streaming is behind investor enthusiasm.
ViacomCBS and Discovery have since all but erased their massive rallies. From its $100 high, ViacomCBS’ shares have fallen 58%, back to pre-COVID-19 levels. Discovery is off 50% from its peak. The two companies lost a combined $65 billion in market capitalization in just five weeks. The rise and fall of ViacomCBS has been more fascinating to watch than most of their TV shows.
We purchased shares of the company prior to the pandemic, believing that the combined Viacom and CBS would create a platform capable of competing with Netflix, HBO, and Disney. We exited our position as shares rebounded from the bottom and hit our fair value estimate (around $40). We were not surprised by the jump above our valuation; we surmised that growth-oriented investors were content to pay up for the subscriber growth story. For us value investors though, the margin of safety was no longer available.
However, as ViacomCBS’ shares roared past $60 and then to $100, we were confounded. Our valuation work and focus on intrinsic value is one of our key differentiators. Was our analysis flawed or missing a material data point that would result in such a higher valuation? After a post-mortem, we concluded that our valuation approach and original investment thesis was sound. We considered a range of scenarios and felt that the company was on its way to generating about $2 billion of free cash flow. But, its high leverage, required investments to ramp up its digital platforms, and fierce competitive landscape warranted a higher discount rate. Our valuation stands at $50, a far cry from $100.
Trading at a market capitalization exceeding $60 billion, with only $2 billion of projected free cash flow, rampant speculation and momentum flows were the only reasons remaining to explain the stock’s disconnect. Trading was heightened by general speculation—record levels of margin debt, IPOs and SPAC launches, small cap stock interest, and a frenzy in cryptocurrencies. The emergence of forums like Reddit where traders can conspire and attack stocks, such as heavily-shorted GameStop, also added fuel to the fire. Many threads about ViacomCBS can be found on various day-trading forums. As the stock ascended, momentum investors, purchasing shares primarily on a stock’s recent performance, climbed aboard, making it a top holding for many momentum funds.
Then the last piece of the puzzle emerged after management took advantage of the unbelievably high share price to raise equity. Shares subsequently corrected, starting a daisy-chain of events that would lead to the implosion of Archegos Capital Management, an aggressive, momentum-based, and highly-levered private investment firm. Using swaps to hide and attain its massive leverage, Archegos established large positions in a number of stocks, including ViacomCBS and Discovery, playing a pivotal role in both their rise and fall.
ViacomCBS’ wild ride ended like many past examples of extreme speculation. Starting with a real story—the successful rollout of its various streaming platforms, accelerated by the COVID-19 global lockdown—with greed and reckless speculation taking over to catapult its price well beyond fair value. The final act, of course, was the implosion.
This story provides several lessons. As evidenced by ViacomCBS’ volatility, stocks can be extremely inefficient in the short run. This presents opportunities amidst the volatility; for buyers when stocks are overly punished and sellers when stocks are driven beyond fair values. And it is a reminder about the importance of valuation to determine an investment’s margin of safety, a required prerequisite for any value investor. ViacomCBS’ move beyond its fair market value was not fueled by fundamentals but rather pure price action, leaving it susceptible to a crash. Now at a 52-week low, these investors are likely parting with shares, just as the company’s valuation is somewhat reasonable again. This episode also provides a lesson about the dangers of leverage. Numerous events can disrupt an investment thesis; leverage amplifies the consequences of these mistakes, potentially causing irreparable harm.
RJ STEINHOFF, CFA
HEAD OF RESEARCH
DISCLAIMER
The information contained herein is for informational and reference purposes only and shall not be construed to constitute any form of investment advice. Nothing contained herein shall constitute an offer, solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Investment accounts and funds managed by Generation IACP Inc. may or may not continue to hold any of the securities mentioned. Generation IACP Inc., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities mentioned.
The information contained herein may change at any time and we have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this presentation. It should not be assumed that any of the securities transactions or holdings mentioned were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities mentioned. Past performance is no guarantee of future results and future returns are not guaranteed.
The information contained herein does not take into consideration the investment objectives, financial situation or specific needs of any particular person. Generation IACP Inc. has not taken any steps to ensure that any securities or investment strategies mentioned are suitable for any particular investor. The information contained herein must not be used, or relied upon, for the purposes of any investment decisions, in substitution for the exercise of independent judgment. The information contained herein has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. We make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained herein. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein.
All products and services provided by Generation IACP Inc. are subject to the respective agreements and applicable terms governing their use. The investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. Nothing herein shall constitute an offer or solicitation to anyone in any jurisdiction where such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation.
Only in the movies do we typically see stories like this one. Shares of media companies have rallied significantly from the March 2020 market bottom, but none can match ViacomCBS’ astonishing 780% move from trough to peak. Disney and Discovery staged impressive rebounds too, rising over 115% and 320%, respectively, both well ahead of the S&P 500. But, clearly, ViacomCBS was in a league of its own. While movie theaters in many countries around the world are slowly welcoming patrons back, the accelerated adoption of streaming is behind investor enthusiasm.
ViacomCBS and Discovery have since all but erased their massive rallies. From its $100 high, ViacomCBS’ shares have fallen 58%, back to pre-COVID-19 levels. Discovery is off 50% from its peak. The two companies lost a combined $65 billion in market capitalization in just five weeks. The rise and fall of ViacomCBS has been more fascinating to watch than most of their TV shows.
We purchased shares of the company prior to the pandemic, believing that the combined Viacom and CBS would create a platform capable of competing with Netflix, HBO, and Disney. We exited our position as shares rebounded from the bottom and hit our fair value estimate (around $40). We were not surprised by the jump above our valuation; we surmised that growth-oriented investors were content to pay up for the subscriber growth story. For us value investors though, the margin of safety was no longer available.
However, as ViacomCBS’ shares roared past $60 and then to $100, we were confounded. Our valuation work and focus on intrinsic value is one of our key differentiators. Was our analysis flawed or missing a material data point that would result in such a higher valuation? After a post-mortem, we concluded that our valuation approach and original investment thesis was sound. We considered a range of scenarios and felt that the company was on its way to generating about $2 billion of free cash flow. But, its high leverage, required investments to ramp up its digital platforms, and fierce competitive landscape warranted a higher discount rate. Our valuation stands at $50, a far cry from $100.
Trading at a market capitalization exceeding $60 billion, with only $2 billion of projected free cash flow, rampant speculation and momentum flows were the only reasons remaining to explain the stock’s disconnect. Trading was heightened by general speculation—record levels of margin debt, IPOs and SPAC launches, small cap stock interest, and a frenzy in cryptocurrencies. The emergence of forums like Reddit where traders can conspire and attack stocks, such as heavily-shorted GameStop, also added fuel to the fire. Many threads about ViacomCBS can be found on various day-trading forums. As the stock ascended, momentum investors, purchasing shares primarily on a stock’s recent performance, climbed aboard, making it a top holding for many momentum funds.
Then the last piece of the puzzle emerged after management took advantage of the unbelievably high share price to raise equity. Shares subsequently corrected, starting a daisy-chain of events that would lead to the implosion of Archegos Capital Management, an aggressive, momentum-based, and highly-levered private investment firm. Using swaps to hide and attain its massive leverage, Archegos established large positions in a number of stocks, including ViacomCBS and Discovery, playing a pivotal role in both their rise and fall.
ViacomCBS’ wild ride ended like many past examples of extreme speculation. Starting with a real story—the successful rollout of its various streaming platforms, accelerated by the COVID-19 global lockdown—with greed and reckless speculation taking over to catapult its price well beyond fair value. The final act, of course, was the implosion.
This story provides several lessons. As evidenced by ViacomCBS’ volatility, stocks can be extremely inefficient in the short run. This presents opportunities amidst the volatility; for buyers when stocks are overly punished and sellers when stocks are driven beyond fair values. And it is a reminder about the importance of valuation to determine an investment’s margin of safety, a required prerequisite for any value investor. ViacomCBS’ move beyond its fair market value was not fueled by fundamentals but rather pure price action, leaving it susceptible to a crash. Now at a 52-week low, these investors are likely parting with shares, just as the company’s valuation is somewhat reasonable again. This episode also provides a lesson about the dangers of leverage. Numerous events can disrupt an investment thesis; leverage amplifies the consequences of these mistakes, potentially causing irreparable harm.
DISCLAIMER
The information contained herein is for informational and reference purposes only and shall not be construed to constitute any form of investment advice. Nothing contained herein shall constitute an offer, solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Investment accounts and funds managed by Generation IACP Inc. may or may not continue to hold any of the securities mentioned. Generation IACP Inc., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities mentioned.
The information contained herein may change at any time and we have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this presentation. It should not be assumed that any of the securities transactions or holdings mentioned were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities mentioned. Past performance is no guarantee of future results and future returns are not guaranteed.
The information contained herein does not take into consideration the investment objectives, financial situation or specific needs of any particular person. Generation IACP Inc. has not taken any steps to ensure that any securities or investment strategies mentioned are suitable for any particular investor. The information contained herein must not be used, or relied upon, for the purposes of any investment decisions, in substitution for the exercise of independent judgment. The information contained herein has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. We make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained herein. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein.
All products and services provided by Generation IACP Inc. are subject to the respective agreements and applicable terms governing their use. The investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. Nothing herein shall constitute an offer or solicitation to anyone in any jurisdiction where such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation.
